Pound Sterling and Bank of England Super-Thursday: What to Expect + Analyst Views

• Spot market rates at time of last update:
• Pound-to-Euro exchange rate: 1 GBP = 1.1328 EUR
• Pound-to-Dollar exchange rate: 1 GBP = 1.3902 USD

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Clues offered by the Bank of England as to when it might raise interest rates again will be a key driver for Pound Sterling over coming weeks, here is what to expect from today's event.

The Bank of England is widely expected to leave its main interest rate unchanged when it announces its latest policy decision on February 8, but the event is still fraught with risk and laden with oppprtunity for Pound Sterling.

The big question is this: Will the Bank of England raise interest rates in May? Markets assign a 50-55% probability that this will indeed happen. Where the dial shifts following today's event will move the Pound. If the odds grow, Sterling will likely rise, if they diminish, Sterling will likely fall.

The vote composition of the initial decision to keep interest rates unchanged will be the first key signal: If two or more members of the Monetary Policy Committee vote to raise interest rates, this could be a positive for Sterling as it suggests the MPC is already shifting towards another vote.

Following the interest rate decision release comes the release of the Bank's latest in-house economic forecasts in the quarterly Inflation Report, which is in turn followed by the press conference.

Pundits reckon it is in the press conference where the next volatility in Sterling could be realised as Governor Mark Carney will be given the chance to fine-tune the Bank's messaging

Analyst Views:

Eias Haddad, CBA

"We anticipate GBP/USD will struggle to recover. 

"We believe the BoE will leave UK GDP growth forecasts unchanged but there is a chance the BoE will downgrade UK inflation forecasts. Consequently, GBP/USD may decline modestly following publication of the Inflation Report."

Elsa Lignos at RBC Capital Markets:

"We don’t expect material changes in the GDP and CPI projections, though the net result of the forecast revisions could be to put less emphasis on the downside risks to the economy.

"With global markets calming down, optimism in the BoE’s forecasts & minutes would likely mean renewed calls for two BoE hikes this year. For GBP, any positive rate dynamic will outweigh the gloom surrounding Brexit talks (at least for now). GBP’s correlation to rate differentials is particularly strong at the moment and markets are less concerned by political risk. That feels unlikely to change today."

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Paul Robson, Ross Walker, Natwest Markets (RBS)

RBS say they expect the Bank of England's guidance to edge in a 'hawkish' direction which could help Pound Sterling on its journey to the fresh multi-month highs against the Euro that they hold in their forecasts.

“There is little prospect of any change in monetary policy settings in February, but we do expect the MPC’s guidance to edge in a ‘hawkish’ direction, leaving a 25bp Bank Rate hike in May as our central case.”

“A significant appreciation in sterling and modestly higher short-term market interest rates appear sufficient, in isolation, to bring about an under-shoot in CPI inflation at the 2-3 year forecast horizon.

“But stronger data outturns, probable upward revisions to GDP and wage inflation, and higher oil prices and some dilution of fiscal tightening will provide a significant offset.”

“The market reaction is more likely to be driven by the vote (we forecast 7-2) and the content of the Minutes and/or press conference.”

“While Brexit will dominate sentiment this year, the economy’s gradual rehabilitation will at times be a powerful counterweight.”

“G10 central banks are still a very long way from tightening. This means any guidance shift would create even more clear water between the BoE and other central banks, and this suggests Sterling to be sensitive to the press conference.”

“We stay long GBP/JPY.”

Robert Wood, Kamal Sharma, Bank of America Merrill Lynch

“Recent MPC speeches suggest to us rate setters are content to 'wait for more data' and are not gearing up for a communication change.”

“We therefore expect the BoE to validate the market curve of three hikes in three years (although the market is pricing in more like four now), upgraded from November's guidance of two in three.”

“The primary reason for not going all in on the next hike yet is inflation. Sterling's gains will, in our view, cut the BoE's two-year inflation forecasts to 2% while growth forecasts will likely be raised.”

“The better growth outlook will justify higher Bank Rate expectations; lower inflation should keep them from pulling the trigger imminently.”

“We think the main risk is the BoE raises growth more than we expect and gives a more hawkish message.”

“In our recent GBP note we argued investors are placing less premium on Brexit negotiations. Evidence from the options market suggests GBP is no longer the idiosyncratic story it once was as the "transition put" underpins sentiment.”

Lee Hardman, Currency Analyst, MUFG

“A stronger growth outlook should encourage the BoE to speed up plans for gradual tightening having signalled a glacial pace of one hike per year in the coming years. A faster reversal of emergency policy settings could already be under consideration.”

“We sensed a more upbeat tone to Governor Carney’s comments...have understandably made market participants wary that the BoE could deliver a more hawkish policy signal at [its] policy meeting when the latest Quarterly Inflation Report will be released as well.”

“The UK rate market has gradually been pricing in a higher likelihood of another BoE rate hike as early as in May, although an August hike is still seen as more likely at this stage.”

“We expect the BoE to feel more compelled to tighten policy further to dampen upside risks to inflation.”

“With growth doing better than expected, the BoE is likely to become more concerned over negative supply implications from Brexit such as lower immigration which pose upside risks to inflation.”

“For the year as a whole, the UK economy expanded by 1.8% in 2017 which represents only a marginal slowdown compared to growth of 1.9% in 2016 and average calendar year growth of 2.0% during the current economic expansion.”

“It clearly highlights that heightened Brexit uncertainty and the squeeze to real incomes from above target inflation have had surprisingly little impact on growth.”

Jordan Rochester, George Buckley, Nomura

“We think it is as true of the UK as it is globally that markets have in the last eight years become far too Pavlovian, sacrificing independent thought for slavishly following the latest central bank utterance.”

“When the facts change the utterances will change. It’s what we expect the BoE communications, in the not too distant future, will do.”

“We think it is as true of the UK as it is globally that markets have in the last eight years become far too Pavlovian, sacrificing independent thought for slavishly following the latest central bank utterance. When the facts change the utterances will change. It’s what we expect the BoE communications, in the not too distant future, will do.”

“Looking at several surveys to garner the direction of inflation, there are signs of upward pressure from input prices at a time when the FX depreciation impact was expected to decline.”

“It suggests the risk to consumer price inflation is that is does not slow as quickly as the BoE and many forecasters expect.”

“This may be particularly true if a positive output gap allows firms to pass on cost increases downstream. That would likely merit further policy normalisation and we still think that the BoE will raise rates again in May and November this year and see two 25bp hikes in 2019.”

“While the front-end BoE rates market has sold off plenty and GBP/USD has moved significantly higher, we think both moves have further to go.”

Jacqui Douglas, Chief European Macro Strategist, TD Securities

“A neutral statement and modest forecast changes should prevail as it's too early to signal a May hike. Market volatility is one more reason to keep the BoE from rocking the boat.”

“The stronger macro backdrop skews risks for a more hawkish tone rather than a dovish surprise. We don't look for a truly hawkish turn until after the UK and EU27 finalise a transition agreement over the next two months.”

“ A steady BoE outcome should keep current GBP trends intact within recent ranges. A hawkish pivot could see some GBP upside risks emerge, but these seem modest for now as main investor focus is elsewhere.”

Fabrice Montagne, Sreekala Kochugovindan, Barclays

“Overall we expect the Bank to remain in wait-and-see mode after its November hike and refrain from revising its communication in the absence of relevant events or data since the last inflation report.”

“We acknowledge that risks to our call are tilted towards an earlier hike.”

“Accordingly, we consider a hike in August as an unlikely but credible risk, but we exclude at this stage a hike in May, which we believe would be premature and would double the pace of tightening (from one per year to one every six months).”

“Market sentiment seems to have improved beyond business and consumer surveys.”

“Following December’s EU-UK withdrawal agreement but particularly following the French President’s state visit to the UK (18/19 January), GBPEUR appreciated to levels not seen since June last year while GBPUSD, boosted by dollar weakness, printed record levels for the post-referendum period.”

“We believe this may be an excessively optimistic interpretation of events, not supported by data or actual Brexit decisions.”

Nikesh Sawjani, UK Economist, Lloyds Banking Group

“We anticipate a unanimous decision among the nine members to leave policy unchanged for now.”

“Market interest rate expectations have shifted in recent months and they now attach about a 50-50 chance to a rate rise in May and are fully pricing in an increase towards the end of the year.”

“We remain comfortable with our call for a quarter-point rate increase in August, but acknowledge that the risk of a May hike has risen, especially if a transitional arrangement is agreed by the end of March for after the UK leaves the EU in March 2019.”

“The Bank’s growth forecasts in the November Inflation Report publication were 1.6% for 2018 and 1.7% for 2019. We expect these to be revised slightly higher in the February update, following recent outturns and strong global economic conditions.”

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